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Edited Transcript of ENGI.PA earnings conference call or presentation 30-Jul-19 7:00am GMT

Half Year 2019 Engie SA Earnings Presentation

Paris Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Engie SA earnings conference call or presentation Tuesday, July 30, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Isabelle Kocher

ENGIE SA - CEO & Director

* Judith Hartmann

ENGIE SA - CFO & Executive VP

* Paulo Jorge Tavares Almirante

ENGIE SA - Group COO & Executive VP

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Conference Call Participants

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* Arthur Sitbon

Morgan Stanley, Research Division - Equity Analyst

* Aymeric Parodi

UBS Investment Bank, Research Division - Equity Research Analyst

* Emmanuel Philippe Turpin

Societe Generale Cross Asset Research - Equity Analyst

* Juan Camilo Rodriguez

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Meike Alina Becker

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* Peter Andrew Bisztyga

BofA Merrill Lynch, Research Division - Head of Pan-European Utilities and Renewables and Director

* Vincent Jean Michel Ayral

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the conference call on ENGIE 2019 half year results organized by ENGIE along with Mrs. Isabelle Kocher, Chief Executive Officer of ENGIE; and Mrs. Judith Hartmann, Executive Vice President and Chief Financial Officer.

For your information, this conference is being recorded. Thank you for holding. Mrs. Kocher, I now hand over to you.

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Isabelle Kocher, ENGIE SA - CEO & Director [2]

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Good morning, and thank you for being with us today. I am very pleased to welcome you alongside Judith Hartmann, our CFO, to present our results for the first half of '19.

I will just start with a few key observations and an overview of the numbers, and Judith will then provide an analysis of our results and also full year outlook. And Judith and I as well as Paulo Almirante, our COO, will then be happy to take your questions.

Our first half results, which you saw earlier this morning, are aligned with management's '19 phasing expectations within the year. And I am pleased to report that these numbers reflect performance improvement in our Client Solutions business line. A very positive second quarter swing in our Client Solutions COI trend was reported. Q1 was atypical, as we told you. Q2 is much stronger and much more in line with what we expect for the full year. And this stronger underlying performance was accompanied by some positive one-offs coming from SUEZ.

Looking at the first half, overall, our growth was driven primarily by first, Energy Management, which drove performance through some successful long-term supply contract renegotiations and by optimizing the positions of our businesses; and second and very happily, the long-awaited performance recovery of our Nuclear operations with improved operational availability output volumes and prices. These positives were partly offset by a reduction in our Networks' contribution, as we anticipated, mainly driven by temporary gas transmission volume impact.

In Renewables, very strong fundamentals, in particular strong growth in wind and solar, was more than offset by weak hydrology. We continue to make positive strides in the implementation of our strategy, which I will describe in a moment. Progress was particularly notable in Renewables as we took some big steps in our organic expansion, as you heard from the team in our recent investor seminar. And as Judith and I described in our call last month, the TAG acquisition represented a significant step in the growth and diversification of our Networks' activity.

For the second half, we expect our prior year comps to ease comparably in particular in relation to nuclear availability and French hydrology. And we expect continued growth momentum in Client Solutions and Renewables with organic growth in Thermal and an improved trend in Networks. Given these expectations, we are confirming our previous full year '19 guidance with growth expected to be weighted towards the second half.

Let's now have a look at our key H1 numbers. EBITDA and COI were EUR 5.3 billion and EUR 3.2 billion, rising organically by 2% and 6%, respectively. Net recurring income group share on continued operation is flat year-on-year due to a higher implicit tax rate. As in '18, we benefited from tax optimization. Net debt stands at roughly EUR 26 billion, a gross increase of EUR 2.8 billion versus the end of '18, mostly due to the TAG acquisition and the extraordinary dividend that we paid in May in lieu of our '19 interim dividend. CFFO decreased mostly due to commodity margin, cold timing and movements in other financial derivatives, but our operating cash flow increased in the first half.

Before we cover the financials in more detail, I'd like to briefly review our major first half business development. In Client Solutions, our strategic progress continued with the win of a significant DHC contract in Canada and the acquisition of Conti, an American energy services player with strong capabilities and an attractive customer operations footprint. In Networks, our TAG acquisition in Brazil has now begun to generate meaningful earnings accretion.

In Renewables, we commissioned 1.4 gigawatts across North America, Brazil, India, Australia. As we got Brazil, I'd like to congratulate our team for the commissioning of our biggest wind farm ever, Umburanas, with 360 megawatts of capacity. We have also made further progress towards our 9-gigawatt incremental capacity target. We have now secured 8.7 gigawatts with some of these new projects already under construction. In our Thermal and Nuclear power generation activities, our teams in Belgium have now successfully restarted all of our nuclear plants while we continue to decarbonize our portfolios through various coal disposals this year.

Turning now to key challenges. In Client Solutions, we faced some difficulties in our Canadian entity, which are currently being addressed by a dedicated action plan, and costs related have been taken in H1 account. We continue to see very substantial growth opportunities in North American Client Solutions. We are accelerating our development, hence the integration of recent acquisitions with short-term integration costs expected to drive significant growth acceleration in the medium term.

In Thermal, we have been impacted by the U.K. capacity market suspension. Last November, the European Union's general approach renewed the commission's decision to accept the capacity mechanism scheme for Great Britain. We expect resolution of the matter and a reinstatement of this mechanism later this year.

In Renewables, hydro volumes in France and Brazil will continue to be subject to climate volatility. And as we have highlighted earlier this year, H1 volumes were low, very low, and we expect a better, more normalized trend for H2. Finally, over the next few months, we will have the regulatory review of the remuneration and investment plan of most of our French-regulated assets.

On another positive note, we are on track to deliver on our Lean 2021 target. Our primary cost action in H1 are related to IT, real estate and procurement. We are confident in our delivery plan for the program over the coming years, covering both cost efficiency and revenue optimization as a meaningful contributor to our earnings momentum.

And I will now hand over to Judith to look at our financials in more detail. Judith, your turn.

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Judith Hartmann, ENGIE SA - CFO & Executive VP [3]

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Thank you, Isabelle, and hello, everybody. Let's now look at our H1 performance by business line.

First, Client Solutions. We flagged, in Q1, Client Solutions' profitability had a soft start into the year due to a few recent contract timing effects and renewables -- renewals. In Q2, those headwinds began to reverse, and the business line delivered a much improved underlying performance benefiting from higher decentralized energy results and on-site generation performance. Indeed, excluding sales, Q1 -- Q2, sorry, was up 9%.

H1 revenues were up 10% and COI increased 4%, excluding the favorable EUR 50 million settlement between SUEZ and the Argentine Government earlier this year. We experienced some difficulties in a few entities for which action plans have been launched, and I expect improvement to be further evident in the second half.

Finally, development costs have increased, constraining margins in H1 as we continued to lay the foundations for a range of newer growth businesses, particularly in the U.S., including startup costs in the electric mobility and microgrid segments. We thus remain confident in our Client Solutions outlook for the rest of the year, and we expect mid- to high-single-digit COI growth for the full year 2019, again excluding the one-off at SUEZ for the Argentina benefit.

We expect Q2's strong underlying performance to continue into the second half as we expect continuing revenue growth momentum supported by an increasing backlog. Our recent contract phasing headwinds are expected to subside, notably in the U.K. We continue to address some selected market dynamics with performance plans to further improve our competitiveness. And contributions from tuck-in acquisitions will deliver greater impact in the second half.

Let's now move to Networks where COI was down 6% in the first half primarily driven by gas transmission. This was in line with our expectations and due to 2 factors. First, a negative volume effect in France mainly due to the merger of the North and South gas market zones. This led to a curtailment of North-South transfer revenues in H1, the impact of which will be largely recouped over the next 2 years through a regulated expense and income clawback account. Second, as anticipated in our current regulatory mechanism, GRTgaz 2019 revenues are subject to smoothing, a delayed true-up mechanism to cover operating costs which covers the 2017-2021 time frame. The April 2019 annual revenue revision only partially covered the additional operating and D&A costs incurred by GRTgaz primarily related to the Val de Saône project.

We also had several headwinds in other Network activities. In storage, technical issues in France during the withdrawal period incurred penalties due to clients, and we renewed some contracts in Germany at lower prices in a difficult market environment. And as already mentioned in Q1, we faced a tough comparable due to positive 2018 one-offs in Latin America, notably, as you will remember, a liquidated damages settlement in Mexico.

Lastly, the major negative temperature effect that we had to face in Q1 has been largely offset by relatively cold temperatures in Q2 resulting in a limited negative year-on-year volume impact on H1 financials for French gas distribution activities. Finally, I'm pleased to note that late in H1, we saw our first incoming earnings from the TAG acquisition following the June closing of the transaction.

And turning to our total year Networks outlook. Notwithstanding the H1 headwinds, we're upgrading our full year outlook for Networks to a low single-digit COI decline in 2019. The most significant driver here is the inorganic earnings contribution of TAG which will, of course, continue for the full second half of the year. Additionally, H2 will benefit from increased French distribution revenues in the summer.

Let's move to Renewables. COI was down 6% in the first half on a gross basis. Organically, Renewables COI is slightly down with minus 2% as a result of negative foreign exchange mainly coming from the Brazilian real. Much lower Hydro volumes in France, given both exceptionally strong 2018 hydro conditions and weak conditions in 2019, had a very significant impact on year-over-year performance and alone drove the Renewables' decline. At normalized hydro conditions in France, Renewables COI would have been up 10% organically.

Indeed, our wind and solar activities are posting impressive performances with more than 50% organic COI growth driven by commissioning of new capacities. As mentioned by Isabelle, we have commissioned 1.4 gigawatts in the semester to be compared with 1.1 gigawatts commissioned for the full year of 2018. And we benefit from the contribution of these assets together with the ramp-up of the ones commissioned last year.

Looking at the rest of 2019, we thus anticipate an acceleration in our Renewable profit delivery in H2 to full year growth rate of mid to high single digit. Although the weak H1 hydrology comparisons will inevitably impact 2019's overall growth rate relative to our medium-term run rate expectations, our H2 performance this year will be enhanced by increasing wind and solar contributions in Brazil as well as the expected settlement for Brazilian hydro producers for past losses incurred in the free market environment. And if the second half performance will also be enhanced by a more favorable comparison for French hydro in H2. DBSO project sell-downs and our associated booking of P&L profits across a range of targeted geographies are intended to take place mainly in H2 2019 as was the case in 2018. Their absolute level may be lower than 2018 given the extraordinary gain from the sale of historical French assets recorded in 2018. Compared to Q1, the reduced full year COI indication is a consequence of the lower hydro volumes in H1 together with slightly less favorable foreign exchange in Brazil.

On the next page, you can see our Thermal and Nuclear businesses, which both delivered positive organic performance in H1 if you add them together. Thermal rose by 5% on organic basis but was down 7% due to a combination of inorganic and partly nonrecurring factors. The disposal of Glow in March 2019 had an impact higher in LNG sourcing costs for [Eclerektica], which is a gas plant in North America. The suspension of U.K. capacity market mechanisms payment since October 2018 are impacting our first hydro business, of course. These headwinds were only partly offset by positive 2019 one-offs mainly in Chile. The ramp-up in Latin America PPA contracts and positive market price conditions in Chile; strong Australian performance, including higher power production volumes and prices; and lastly, dynamic management of the optionality of our European gas generation portfolio.

Conversely, as expected, Nuclear COI was up 29% in the first half on the back of better achieved prices, up EUR 3 per megawatt hour; a lower depreciation charge following 2018 impairments; and the successful restart of all of our Belgian reactors, resulting in higher output volumes, up by 4% compared to the H1 of 2018, as availability rose by close to 600 basis points this year.

For the full year outlook, we are thus upgrading our expectations for Thermal and Nuclear. We expect Thermal COI reduction of approximately 15% versus 20% anticipated 3 months ago, largely due to the positive one-offs booked in Latin America in Q2. The other drivers remain unchanged versus end of Q1, namely the impact from disposal of Glow year-to-date, partly offset by continuing PPA growth in Latin America and by higher Thermal spreads in Europe. And we're assuming the reinstatement of capacity market mechanism in the U.K. Excluding the inorganic impact of the Glow disposal, we expect a 3% increase in Thermal COI for this year. We also upgrade our Nuclear outlook. We now expect to reduce 2018's losses by 75% versus 66% in our previous outlook. One driver is the recent postponement of plant maintenance of Tihange 1 from H2 2019 to H1 2020.

In Supply, the significant COI reduction of approximately 20% in H1 was mainly driven by continuing margin pressure in French retail and negative temperature effects in Australia. This was only partially offset by increased power margins in the B2B and supply business.

In Other activities, our Energy Management business performed well in its renegotiation of long-term gas contracts and its international development. The year-on-year performance is partially offset by the 2018 comparable regarding the cold snap that we had last year. You will remember this. In addition, our latest group efficiency program, Lean '21, has begun to deliver cost savings also at the corporate level, and that is translating into our numbers.

In Supply, we now anticipate a slightly lower year-on-year decline in 2019 with COI to be down mid-single digits. The upgrade mainly reflects a better outlook for our B2B supply power margins and colder temperature recorded in the second quarter. In the Other segment, we expect 2018 losses to be cut by 15%, a slight improvement versus our expectation at the end of Q1. This reflects the good performance of Energy Management activity, yet, in H1, this should normalize.

To conclude on the review of our operational performance, let's take a step back and have a look at our new matrix providing you the granularity of financial contributions by business line and by geography. By business line first. As you can see, Networks is the largest contributor to our COI, about 42% in the first half. Ranked by size, the other main contributors are Thermal, 22%; Renewables, 18%; and Client Solutions, 14%. I also want to highlight the strong reduction in Nuclear losses weighing far less than our results compared to what we experienced in 2018.

In terms of geographies, beyond France which represents 51% of our COI, we have 2 other segments largely contributing: Latin America, 26% of the total; and Middle East, Asia, Africa with 12% of the total.

Turning to cash flows on the next page. CFFO was down by EUR 800 million in H1 year-on-year mainly due to timing effects from commodity-related margin calls and financial derivatives. Our operating working capital and operating cash flow have slightly increased. We expect CFFO to substantially increase by the year-end mostly on the back of a significant reversal of the margin calls and financial derivatives. And CFFO H1 2019 was significantly below in -- versus H1 2018. We mentioned most of this already in the first half. And so again, this should reverse in the second half.

If you now look at the second -- on the next page, financial net debt increased by EUR 2.8 billion to EUR 26.1 billion at the end of H1, mostly due to the TAG acquisition and the extraordinary dividend of EUR 0.9 billion. Cost of gross debt at the end of H1 is 2.86% (sic) [2.89%] and decreased by 13 basis points since 2015.

Financial net debt-to-EBITDA stands at 2.7x and economic debt -- net debt-to-EBITDA at 4x. Excluding the TAG acquisition which does not contribute yet to EBITDA, the net financial debt-to-EBITDA ratio amounted to 2.5, slightly increasing compared with the end of 2018 and on the target of less than or equal to 2.5x.

S&P and Fitch have confirmed their ratings, A- and A, respectively, both with a stable outlook. And Moody's has downgraded its long-term rating to A3 following the adoption of the Loi PACTE in France that has prompted a reappraisal of its 1 notch uplift for government support.

With that, let me hand back to Isabelle.

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Isabelle Kocher, ENGIE SA - CEO & Director [4]

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Thank you, Judith. So to very briefly summarize the key points, our H1 '19 results are in line with overall group expectations and phasing outlook for '19. We expect growth to further accelerate in the second half, therefore, we reconfirm today our full year guidance for '19.

And we are now happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Aymeric Parodi of UBS.

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Aymeric Parodi, UBS Investment Bank, Research Division - Equity Research Analyst [2]

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I've got 3 questions. The first one is regarding the nuclear provision in Belgium. I think we have the triennial review letter this year which could imply potentially an increase. Could you provide us some details regarding the review process and the potential time line and also share with us your expectations of scenarios that you could have in mind?

The second one is on the Client Solutions. Could you help us to quantify the growth we expect over the second semester? And the last one, could you also update us regarding your M&A policy? What are the assets you are interested in mainly and also the geographic and the area you are targeting?

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Isabelle Kocher, ENGIE SA - CEO & Director [3]

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Thank you very much. I will start with the M&A part of your question and then I will let Judith answer in our Nuclear and Client Solutions. On M&A, I mean we continue to work on the pipe of small- and medium-sized acquisitions. And they are, I'd like to insist on that, they are always extremely selective. We target key geographies, typically the U.S., as I mentioned with the recent Conti acquisition, or we target specific technologies.

We recently, for example, acquired a player in the U.K. specialized in EV, on green mobility, electric vehicle charging stations. So that's typically the kind of target we look at. No transformative M&A in our pipe, but really something that is extremely structured and selective. And we'll -- I'd like to insist on that because that's really something we built over the last years, an integration process that we know much more systematic and much more efficient and organized, let's say, than it was in the past.

Judith, on the Client Solutions?

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Judith Hartmann, ENGIE SA - CFO & Executive VP [4]

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Yes, absolutely. Thank you for this question. So the nuclear provisions, you're right, there is a triennial revision that is going to happen this year. So the way it works is in the second half of the year, there will be information exchanges with the commission of the nuclear provision. And they will update their scenarios both on the discount rate but also on the industrial hypothesis assumptions. And so you -- we will get news by the end of the year, like you probably saw in our accounts' notes. There is no impact, of course, on the first half yet, way too early. But we will have news on this at the end of the year. And we will, of course, keep you posted as news become available.

On your second question on Client Solutions. So like you said earlier, the full year outlook is up mid- to high-single-digit growth for the total year, which means that there is some underlying acceleration in the second half. We mentioned it earlier. The Q1 was quite unusual for us. In Q2, you can already see some improvement, and we're really starting to see the topics kicking in that we were expecting to see. And so we are confident on the up mid- to high-single-digit growth for the end of the year.

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Isabelle Kocher, ENGIE SA - CEO & Director [5]

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And to complete that answer, I'd like to highlight that we are very confident in our Client Solutions dynamic. Our fundamentals are very solid. Promotional dynamic is good where you've seen a 10% revenues growth. And really, I would like to say that our asset-based strategy is really promising. We have on the DHC, district heating and cooling segment, a lot of successes already during H1. And a very promising pipe of more generally, I would say, asset-based projects that are currently already under discussion like, of course, DHC, but public lighting in a lot of geographies with interesting prospects in Brazil and Europe with the integrated solutions, with the on-site generation included, exactly as we did for Ohio State University, with a really interesting pipe of a few universities again in particular in the U.S.

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Operator [6]

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We'll take our next question from Emmanuel Turpin of Societe Generale.

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Emmanuel Philippe Turpin, Societe Generale Cross Asset Research - Equity Analyst [7]

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I have a few questions of detail regarding H1 on the outlook for the full year. Number one, your -- the negative impact of the poor hydro situation, could you help us quantify in euro million how much it cost you in the first half versus last year? And more interestingly, to help us for our forecast for next year, how much worse was it than a normal situation?

The second question was trying to assess how much you booked in terms of DBSO margin for the first half of '19. You highlighted that most of it would be booked maybe in the second half. On that '19, it would be -- we'd booked lower against than '18. Nevertheless, I'd be interested in the situation for the first half.

And the next question is on the Chilean one-offs. You did mention positive one-offs from that country. Could you help us quantify it, please? And last question would be on the Lean effort. How much of gains and cost savings that we -- did you book in the first half versus your full year budget?

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Judith Hartmann, ENGIE SA - CFO & Executive VP [8]

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Emmanuel, a good list of questions, thank you. So let me take them one by one. On the Chile one-off positive impact in H1, it is related to liquidated damages. So very often when we build plants and they might be delayed by some of the contractors, but often, it leads to liquidated damages, and that was the case in the most recent Chile plant. And the amount was between -- was close to -- was higher than EUR 50 million, let's put it that way. And so that was positive. And like I said, that's quite usual to have it when we have plants going online. And so -- and we have this every year.

You had another question on the hydro in France which, like you said, you will remember that last year, we had more than -- we had higher-than-normal hydro conditions. And this year, we had lower-than-normal hydro conditions. And so you added altogether versus last year, it was a variance, it was close to EUR 100 million in terms of euros.

And your question on forecasting for next year, I wouldn't take that as a normal year. I think we're going to continue to see variations in hydro, just like we always have seen, and that is, of course, going to be one of the elements that is going to flex. And like you pointed out on Renewables more generally, the underlying improvement is very significant. We are putting online close to double the wind and solar for the total year than we did last year. So quite frankly, we are very happy with our Renewables performance. And then like you said, the underlying hydro might flex from one year to the other.

Your question on the DBSO, indeed, like we said, it was lower -- much lower in the first half than what we are expecting in the second half. And it was around about EUR 20 million in the first half.

And then you had one last question on Lean, which is a very significant driver of our continuous improvement, of course, and it's important to stay competitive. And the impact in the first half was around EUR 120 million this year.

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Operator [9]

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We'll take our next question from Meike Becker of Bernstein.

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Meike Alina Becker, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [10]

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I have 3 at this point. In terms of your guidance, you're confirming it. Could you give us a little bit more detail, maybe if we are at the upper end or at the lower end, where your confidence level is with regards to the guidance range?

The question number two is on Client Solutions. You mentioned the contract in Canada and what you're doing to improve the situation, if you could expand a little bit more.

And also, you mentioned, my second question on Client Solutions, the growth rate of high single digits for this year. Are you still comfortable with the growth rate that you have given for all of the plan of your business plan, which was a little bit higher, if I remember correctly, 11% to 14%? So if you could just put these 2 numbers in relation, that would be great.

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Judith Hartmann, ENGIE SA - CFO & Executive VP [11]

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Well, let me start. Thank you, Meike, for the question. Let me start with the guidance. It's too soon to be more specific on high end, low end, but what I will say is we're very confident. I looked at the first half results, but frankly, they're better than our internal budget. We don't give a quarterly guidance, of course, to the market, but we have our internal budget. And I really feel that we've created some buffer here. And so we are very confident in reaching the guidance for the total year. What could be some risks and opportunities, as usual, you could have, of course, the price and FX movements. That could go both ways for that matter. Of course, you could have additional temperature effects. In the first half, we were very happy that we were -- that temperature effects are close to 0, quite frankly, after a very big impact in the first quarter, almost completely offsetting the second quarter. So that's very good. Again, gives us some confidence going into the rest of the year.

And then, of course, I would mention 2 things that are on the regulatory side. We mentioned the capacity payment in the U.K. It is our assumption that it's going to be reinstated, and that assumption comes from the fact that this was contested on administrative reasons and not on the actual content of this. So we are confident that this is going to be reinstated. But that's an assumption, of course. And then there is also an assumption in there, like I mentioned in my presentation, on out-of-merit order reimbursement in Brazil. And so that is -- it is also something that we have included in our assumptions.

Now when you -- with respect to your questions on Client Solutions, yes, indeed, we do -- we're confident in both -- I think the examples that Isabelle gave were great examples of showing the underlying commercial dynamics that we're seeing and the types of topics that we're going after. And so we believe -- and again, I mentioned it that the COI growth of the second quarter was 9%. I mentioned the 10% sales increase. So quite frankly, we're confident that we can reach the guidance that we've just mentioned on Client Solutions. And yes, we are committed to execute on the guidance we had given, the midyear guidance that -- midterm guidance, sorry, that we had given at the Capital Markets Day. You remember that we had mentioned that there will be some tuck-in acquisitions that are going to help us. But frankly, we're going to see it in the second half of the year already with a contribution from some of the acquisitions done last year and early this year. But that's going to continue over the course of the next years.

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Operator [12]

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We'll now take our next question from Peter Bisztyga of Bank of America.

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Peter Andrew Bisztyga, BofA Merrill Lynch, Research Division - Head of Pan-European Utilities and Renewables and Director [13]

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Just one question from me on the Client Solutions business again. You mentioned that there have been some difficulties in a few build and install entities and you've sort of launched an action plan to deal with these. I was just wondering if you could give us a little bit more detail as to exactly what's happening. Has there been some sort of systemic problem across a couple of businesses or something specific to particular projects?

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Judith Hartmann, ENGIE SA - CFO & Executive VP [14]

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Peter, thank you for the question. No, I wouldn't -- it's not systemic. We will have -- we want to make sure when we present the results that we're balanced and not just talk about all the upsides, but also talk about some of the things that we're working in terms of pressure points. And clearly, this is a business where every now and then, we're going to have pressure on certain contracts. I had mentioned at the beginning of the year some timing of contract renewals, first half versus second half; some pressure on U.K. and Italy, you will remember these contract prices; and then we're working also on some action plans on costs in certain areas, especially Canada is a point in case at this point in time. But again, I think we will have those kind of topics in this kind of business. We're obviously staying closer, then we have worked quick action plans that we've put in place, and so that's where the confidence comes from for the rest of the year.

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Operator [15]

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We will take our next question from Vincent Ayral of JPMorgan.

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Vincent Jean Michel Ayral, JP Morgan Chase & Co, Research Division - Analyst [16]

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Just wanted to get your views on the consultation paper that was published by the regulator regarding the ATRT7, so the gas transmission regulation. The range it provided is actually fairly good. What is your take on it? And basically, do you see some level of read across on the general approach of the French regulator towards again assets?

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Judith Hartmann, ENGIE SA - CFO & Executive VP [17]

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Vincent, thank you for the question. Indeed, there was a communication by the regulator earlier this week -- or earlier this month, I would say. It's too early to speculate about potential outcomes. There obviously -- there's going to be an exchange of information, and the process has only started. We're going to have more detailed news in the second half. A quick consultation, like they mentioned, a range of 3.6 to 4.4. I would say this is relatively in line with the expectation that we had on -- I mean interest rates have come down in the last 6 months again, so there isn't any big surprise there.

I would note that this also includes assumptions on a lower tax rate. So that would impact your COI. But then, of course, the low COI would have a positive because we're going to benefit from the lower tax rate. So it's early days, but we're going into this with a positive spirit and are looking forward to a constructive exchange with the [client] on the topic.

On the read across, frankly, yes, there will be a read across on some of the other businesses, but like you said, constructive exchanges and looking forward to the exchange with the regulator.

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Vincent Jean Michel Ayral, JP Morgan Chase & Co, Research Division - Analyst [18]

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And just to come back on the tax element, actually we saw that. Would it be possible for the regulator to actually go to this range, making the assumption of a lower tax? Or should we expect something which may be more reasonable to say, we will have basically a range which is 30 bps higher on the return and if the corporate tax goes down, then you will have an adjustment for the pass-through?

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Judith Hartmann, ENGIE SA - CFO & Executive VP [19]

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So on the tax rate, so I guess I want to put 2 things forward. One is -- one, it completes what I said earlier is the remuneration of the asset base is an important element, but it's obviously not the only element of our financial results. And so the point I was making -- then you have the other -- you have topics that are indeed pass-through. You have the operational performance on the operating costs, so you have a different topic that can impact your bottom line at the end of the day. The remuneration percentage is an important input into this.

But the point I was making on tax is if the regulator looks at tax rates going down and they implement this in the remuneration range, then that's obviously due to the expectation that tax rates will go down. But conversely, when you then look at net income, we should see that benefit also on the reduction of the tax rate. And so that will be partially offset. We are -- one of the discussions that are ongoing is whether or not this should be a pass-through element. But again, it's early days, and so it's way too early to give you specifics on this.

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Operator [20]

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We'll take our next question from Arthur Sitbon of...

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Isabelle Kocher, ENGIE SA - CEO & Director [21]

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May I? Just for the full clarity of that topic. The intent of the regulator is to have an adjustment, again, that is to say if by chance the tax rate stay at their current level, there is a CRCP mechanism that allows the regulator to adjust the remuneration rate of the regulated asset base.

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Operator [22]

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We will now take our next question from Arthur Sitbon of Morgan Stanley.

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Arthur Sitbon, Morgan Stanley, Research Division - Equity Analyst [23]

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Yes. But actually, my questions have just been answered, so that's fine. Thank you.

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Operator [24]

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(Operator Instructions) We will take our next question from Juan Rodriguez of Kepler Cheuvreux.

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Juan Camilo Rodriguez, Kepler Cheuvreux, Research Division - Equity Research Analyst [25]

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I have one question on my side. On the capacity market, it has been -- on the U.K., it has been signaled that would be restated on the second half. Can you please quantify what will be the impact of this and what has been included in your guidance?

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Paulo Jorge Tavares Almirante, ENGIE SA - Group COO & Executive VP [26]

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As you know, the capacity market in the U.K. has been suspended, as it was mentioned before. We expect something of the order of EUR 50 million to EUR 60 million of capacity remuneration for this year. And we are confident that it will be reinstated by quarter 4 2019. As you probably know, the money continues to be collected from the client by the TSO, and it is not distributed to the power operators at the moment, but we believe that it will be reinstated.

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Operator [27]

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Ladies and gentlemen, there are no more questions. I now hand over to Mrs. Kocher.

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Isabelle Kocher, ENGIE SA - CEO & Director [28]

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So thank you very much for attending this call, and we all wish you a very good holiday.

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Operator [29]

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Ladies and gentlemen, this concludes this conference call. Thank you for participating. You may now disconnect.